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UNITED ONLINE INC
FORM 10-K
(Annual Report)
Filed 03/06/06 for the Period Ending 12/31/05
Address 21301 BURBANK BOULEVARD
WOODLAND HILLS, CA 91367
Telephone 8182873000
CIK 0001142701
Symbol UNTD
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2008, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    UNITED ONLINE INC FORM 10-K (Annual Report) Filed 03/06/06 for the Period Ending 12/31/05 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 21301 BURBANK BOULEVARD WOODLAND HILLS, CA 91367 8182873000 0001142701 UNTD 7370 - Computer Programming, Data Processing, And Computer ...

  • Page 2
    ... 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2005 or 3 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-33367 UNITED ONLINE, INC. (Exact name of...

  • Page 3
    ... statements include, but are not limited to, statements about the markets in which we compete, our pay accounts and subscriptions, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, capital requirement, tax payments and our cash position...

  • Page 4
    ...NetZero, Juno and Classmates Online. Our subscription services include dial-up Internet access, social-networking, Voice-over-Internet Protocol (VoIP) telephony, personal Web-hosting, premium email, Internet security and online digital photo-sharing, among others. We also offer advertising-supported...

  • Page 5
    ... rates per minute and a number of other features such as call forwarding. Web Hosting Our Web-hosting services, which include domain name registration services, are offered through various pricing plans, generally from $1.99 to $9.99 per month. A limited, advertising-supported version of the service...

  • Page 6
    ...access services include Norton's antivirus service free of charge and members can upgrade to a more complete Norton Internet Security package that includes antispyware, parental controls and other features for an additional $1.95 per month. Advertising Services The United Online Media Group connects...

  • Page 7
    ...increase in lower-income households accessing the Internet, where penetration rates have historically been lowest, position the value-priced segment to increase its share of the U.S. market for dial-up access, although we do not expect our access services to grow. Online Social Networking Classmates...

  • Page 8
    ...consumer Internet services positions United Online to capitalize on that opportunity. Consumer Internet Services Strategy Through 2003, virtually all of United Online's operations were focused on providing value-priced dial-up Internet access services in the U.S. and Canada. During 2005, competitive...

  • Page 9
    ...free accounts and pay accounts to new and additional pay services. These efforts include television, Internet, sponsorships, radio, print and outdoor advertising as well as a variety of distribution initiatives with partners including retailers, personal computer manufacturers and software providers...

  • Page 10
    ... to sign-up for one of our prepaid multi-month billing plans. Fees charged to accounts for live telephone technical support are generally billed to a credit card and are charged on a per-minute basis. We utilize a combination of third-party and internally developed software applications for customer...

  • Page 11
    ... our access services billed on a per-minute basis and telephone billing support for free. We monitor the effectiveness of our user support functions and measure performance metrics such as average hold time and first call resolution and abandonment rates. Communications with accounts are logged and...

  • Page 12
    ... internally developed software is written in Perl. Most third party software licenses are perpetual or open source. Billing is done through open source software, or in some cases uses Portal's application. Support for our social-networking business and its Web services is provided by a combination...

  • Page 13
    ... on offering dial-up Internet access services at prices below the standard monthly pricing of the premium dial-up services of most of our major competitors. Competition from broadband providers and value-priced providers such as United Online has resulted in significant declines in the number of...

  • Page 14
    ...-priced services include at no additional charge telephone technical support, proprietary content, parental controls, multiple accounts and email addresses, increased email storage, virus protection, firewalls, spyware protection and accelerated dial-up functionality. Some providers of value-priced...

  • Page 15
    ... to our services and pricing strategies, which could result in increased costs, decreased revenues and the loss of pay access accounts, all of which could materially and adversely impact our financial condition, results of operations and cash flows. Competition in the Online Relationships Market...

  • Page 16
    ...has relied extensively on Internet advertising through portals and other Internet service providers, including AOL, MSN and Yahoo!, to grow its base of free and pay accounts. A number of these companies are competitors of United Online with respect to Internet access and other services, and they may...

  • Page 17
    ... the quality of our services and the effectiveness of advertising by our advertising customers. SEASONALITY We have experienced seasonal trends in connection with our access services. In general, we have experienced increased Internet usage and increased pay access account subscriptions in the fall...

  • Page 18
    ... relationships with employees to be good. AVAILABLE INFORMATION Our corporate Web site is www.untd.com. On this Web site, we make available, free of charge, our annual, quarterly and current reports, changes in the stock ownership of our directors and executive officers, our code of ethics and other...

  • Page 19
    ... known to us or that we currently deem immaterial may also affect us. If any of these risks actually materialize, our business, financial position, results of operations and cash flows could be adversely impacted. In that event, the market price of our common stock could decline and you may lose...

  • Page 20
    ... manage, integrate or grow our Web-hosting, photo-sharing and Classmates businesses. In April 2004, we acquired the assets of About, Inc.'s Web-hosting business, in November 2004, we acquired Classmates and in March 2005, we acquired the assets of Homestead Technologies, Inc.'s online digital...

  • Page 21
    ... and operations; • difficulty assimilating and retaining employees from the acquired business; • risks of entering markets in which we have little or no direct prior experience; • lack of controls, policies and procedures appropriate for a public company, and the time and cost related to...

  • Page 22
    ... may be much lower than our total number of accounts. We may not successfully develop and market new services in a timely or cost-effective manner; consumers or advertisers may not accept our new products. We may not be able to compete effectively if we are not able to adapt to changes in technology...

  • Page 23
    ... with similar agreements with new customers. If our access accounts usage increases or our telecommunications costs increase, our business may suffer. Other than sales and marketing, our telecommunications costs are our largest expense. If the average monthly usage of our access users increases, or...

  • Page 24
    ... in market rates would increase the cost of providing our services and, if significant, could have a material adverse effect on our business, financial position, results of operations and cash flows. If we fail to manage our telecommunications or our internal network capacities, our access service...

  • Page 25
    ... customer data, excessive credit card chargebacks or refunds, delays in new product or payment plan introductions and other billing-related errors. Such problems could lead to inaccurate reporting from time to time, which could adversely affect our business, financial position, results of operations...

  • Page 26
    ...telecommunications service providers, providers of customer support services and other vendors. Unauthorized or inappropriate access to, or use of, our networks, computer systems and services could potentially jeopardize the security of confidential information, including credit card information, of...

  • Page 27
    ..., claims in connection with employment practices, securities laws claims, breach of contract claims and other business related claims. The nature of our business could subject us to additional claims for similar matters, as well as a wide variety of other claims including, without limitation, claims...

  • Page 28
    ...are considered "information service" providers rather than "telecommunications" providers, and regulations that apply to telephone companies and other telecommunications common carriers currently do not apply to our Internet access services. However, our Internet access services could become subject...

  • Page 29
    ...telecommunications providers because our ability to offer telephone numbers from a variety of California area codes would be limited. Also, future customers may not be able to transfer their existing telephone numbers to our service. These results could have a material adverse effect on our business...

  • Page 30
    ..., the cost of its Internet access services, its cancellation terms and local versus long-distance charges, as well as the requirement to provide adequate customer support to process cancellations. We received an inquiry regarding our compliance with the consent agreement on October 14, 2005, and...

  • Page 31
    ...computer equipment, including critical equipment dedicated to our Internet access services, is located at our headquarters in Woodland Hills, California and at facilities in and around Los Angeles, California; San Jose, California; Ashburn, Virginia; Renton, Washington and New York, New York. In the...

  • Page 32
    ... market price of our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We currently maintain the following principal facilities: Approximate Facilities Location Square Feet Lease Expiration Principal executive and corporate offices Operations facility Customer support and...

  • Page 33
    ... 2006. On August 21, 2001, Juno commenced an adversary proceeding in U.S. Bankruptcy Court in the Southern District of New York against Smart World Technologies, LLC, dba "Freewwweb" (the "Debtor"), a provider of free Internet access that had elected to cease operations and had sought the protection...

  • Page 34
    .... Prior to that, NetZero common stock had been quoted on the NASDAQ under the symbol "NZRO" since September 23, 1999. The following table sets forth, for the quarters indicated, the high and low prices per share of our common stock as reported on the NASDAQ. High Low Year Ended December 31, 2004...

  • Page 35
    ... our intention to offer our eligible employees the opportunity to exchange any outstanding stock options granted to them which have an exercise price per share of our common stock at or above $16.00 (the "Eligible Options") in return for restricted stock units ("RSUs"). The number of RSUs that...

  • Page 36
    ...the six months ended December 31, 2003. Net income included tax benefits of $4.3 million for the year ended June 30, 2003. In September 2001, NetZero and Juno merged and became wholly-owned subsidiaries of United Online. The results of Juno are included in our consolidated results of operations from...

  • Page 37
    ... a number of brands, including NetZero, Juno and Classmates Online. Our subscription services include dial-up Internet access, social-networking, VoIP telephony, personal Web-hosting, premium email, Internet security and online digital photo-sharing, among others. We also offer advertising-supported...

  • Page 38
    ...devote significant resources to our Internet access services, we have diversified our business by acquiring or developing a number of non-access Internet services, including social-networking, VoIP, personal Web-hosting, premium email and content, and online digital photo-sharing. A significant part...

  • Page 39
    ...revenues consist of subscription fees charged to pay accounts for dial-up and accelerated Internet access services, socialnetworking, Web-hosting and domain name registration services, premium email services, premium content, Internet security, photo-sharing services and VoIP. In addition, we charge...

  • Page 40
    ...decline in ARPU for our access services due to increased use of free months of service and promotional pricing to obtain or retain pay access accounts, offset partially by an increased number of subscriptions to our accelerator services. For the year ended December 31, 2005, approximately 16% of our...

  • Page 41
    ...our non-access services. Cost of Billable Services Cost of billable services includes direct costs of billable services and costs that have been allocated to billable services. Direct costs consist of costs related to providing telephone technical support, customer billing and billing support to our...

  • Page 42
    ... free accounts upgrading to our pay services, fewer new free account sign-ups and additional accounts becoming inactive. Telecommunications hours allocated to our free access accounts decreased to approximately 3% of total telecommunications hours purchased during the year ended December 31, 2005...

  • Page 43
    ... include advertising and promotion expenses, fees paid to distribution partners to acquire new pay and free accounts, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services...

  • Page 44
    ... customer support personnel. In addition, general and administrative expenses include fees for professional legal, accounting and financial services, office relocation costs, non-income taxes, insurance, and occupancy and other overhead-related costs, as well as the expenses incurred and credits...

  • Page 45
    .... Provision for Income Taxes For the year ended December 31, 2005, we recorded a tax provision of $40.2 million on pre-tax income of $87.4 million, resulting in an effective tax rate of 46.1%. The effective tax rate differs from the statutory rate primarily due to compensation, including stock-based...

  • Page 46
    ... effective tax rate differs from the statutory rate primarily due to the release of substantially all of the balance of the valuation allowance attributable to the expected utilization of net deferred tax assets in the future. At December 31, 2005, the Company had net operating loss and tax credit...

  • Page 47
    ... number of pay accounts by 726,000; increased spending on marketing and promotion of our pay services, particularly our accelerator services; the introduction of new pay services, particularly our premium email services; an expansion of our online and offline distribution channels; our Web-hosting...

  • Page 48
    ... support costs per pay account primarily as a result of better pricing obtained from our principal customer support vendor; and a decrease in average hourly usage per pay access account. Cost of Free Services Cost of free services decreased by $2.3 million, or 23%, to $7.4 million for the year ended...

  • Page 49
    ... balance on the term loan in the December 2004 quarter. Provision for Income Taxes For the year ended December 31, 2004, we recorded a tax benefit of $34.1 million on pre-tax income of $83.4 million. The effective tax rate differs from the statutory rate primarily due to the release of 48

  • Page 50
    ...SFAS No. 109, Accounting for Income Taxes , including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Section 382 of the Code, future income projections and potential tax-planning strategies. Based upon our assessment...

  • Page 51
    ... of better pricing obtained from our primary customer support vendor; decreased depreciation expense; and a slight decrease in average hourly usage per pay access account. Cost of Free Services Cost of free services decreased by $2.9 million, or 43%, to $4.0 million for the six months ended December...

  • Page 52
    ... for the six months ended December 31, 2002. The increase was primarily attributable to a $29.9 million increase in marketing and promotion costs as a result of an expansion in marketing activities that focus on increasing our pay account base, promoting our accelerated dial-up services and building...

  • Page 53
    ...The effective tax rate differs from the statutory tax rate primarily due to the release of valuation allowance attributable to the expected utilization of net operating loss and tax credit carryforwards in the years ending December 31, 2004 and 2005, offset by current California state income tax. In...

  • Page 54
    ...and operating expenses and the timing of related cash receipts and payments, including an $8.7 million increase in income taxes payable; and • a $15.6 million increase in depreciation, amortization and stock-based compensation in the year ended December 31, 2005 compared to the year ended December...

  • Page 55
    ... in capital equipment purchases and capitalized software costs in connection with the development of new products and the ongoing operations of our business; and • a $4.6 million increase in purchases of rights, patents and trademarks, primarily related to the purchase of proprietary rights...

  • Page 56
    ...vesting of RSUs, was $1.6 million. The amount we pay in future quarters will vary based on our stock price and the number of RSUs vesting during the quarter. Based on our current projections, we expect to continue to generate positive cash flows from operations, at least in the near term. Cash flows...

  • Page 57
    ... from pay accounts are recorded on the balance sheet as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by ACH, personal check or money order or through a local telephone company. In...

  • Page 58
    ..., significant declines in our stock price for a sustained period or significant underperformance relative to expected historical or projected future results of operations. We determine reporting units by allocating assets, including goodwill, based on the related service offerings. In testing for...

  • Page 59
    ... business combinations. Under the purchase method of accounting, the cost, including transaction costs, is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded...

  • Page 60
    ...123R becomes effective in the March 2006 quarter, and we expect that the adoption of SFAS No. 123R will have a material impact on our operating income, net income and earnings per share. However, uncertainties, including our future stock-based compensation strategy, stock price volatility, estimated...

  • Page 61
    .... We do not expect the implementation of SFAS No. 154 to have a material impact on our financial position, results of operations or cash flows. Inflation Inflation did not have a material impact during the years ended December 31, 2005 and 2004, and we do not currently anticipate that inflation will...

  • Page 62
    ... all other applicable currencies) are monitored throughout the year. We face two risks related to foreign currency exchange: translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. dollars using period-end exchange rates. The resulting translation...

  • Page 63
    ... Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer...

  • Page 64
    ... Securities and Exchange Commission within 120 days after the end of our fiscal year. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements: Page Report of Independent Registered Public Accounting...

  • Page 65
    ... for 2001 Supplemental Stock Incentive Plan Classmates Online, Inc. Amended and Restated 1999 Stock Plan Classmates Online, Inc. 2004 Stock Plan Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan United Online, Inc. 2005 Management Bonus Plan Amended and Restated Employment...

  • Page 66
    ... between the Registrant and Robert Taragan Office Lease between LNR Warner Center, LLC and NetZero, Inc. Credit Agreement, dated as of December 3, 2004, among United Online, the Lenders party thereto from time to time, Deutsche Bank Trust Company Americas, as Administrative Agent, and Deutsche...

  • Page 67
    ... the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on ... Officer (Principal Financial Officer) Senior Vice President, Finance, Treasurer and Chief Accounting Officer (Principal Accounting Officer)...

  • Page 68
    ... and Plan of Merger, dated October 23, 2004, among United Online, Inc., Mariner Acquisition Corp. and Classmates Online, Inc. Amended and Restated Certificate of Incorporation Amended and Restated Bylaws Certificate of Designation for Series A Junior Participating Preferred Stock (included in...

  • Page 69
    ... between the Registrant and Robert Taragan Office Lease between LNR Warner Center, LLC and NetZero, Inc. Credit Agreement, dated as of December 3, 2004, among United Online, the Lenders party thereto from time to time, Deutsche Bank Trust Company Americas, as Administrative Agent, and Deutsche...

  • Page 70
    UNITED ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders' Equity Consolidated ...

  • Page 71
    ... position of United Online, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004, the six months ended December 31, 2003, and the year ended June 30, 2003 in conformity with accounting...

  • Page 72
    ... (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not...

  • Page 73
    UNITED ONLINE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2005 December 31, 2004 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowance for doubtful accounts of $1,325 and $647 at December 31, 2005 ...

  • Page 74
    ...Year Ended December 31, 2005 2004 Six Months Ended December 31, 2003 Year Ended June 30, 2003 Revenues: Billable services Advertising and commerce Total revenues Operating expenses: Cost of billable services (including stockbased compensation, see Note 8) Cost of free services Sales and marketing...

  • Page 75
    UNITED ONLINE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2005 2004 Six Months Ended December 31, 2003 Year Ended June 30, 2003 Net income Unrealized gain (loss) on short-term investments, net of tax of $(193), $(452), $(553) and $992 for the ...

  • Page 76
    ...from stock options Net income Balance at December 31, 2004 Issuance of common stock through employee stock purchase plan Exercises of stock options Repurchases of common stock Issuance of restricted stock units Cancellation of restricted stock units Cancellation of options assumed in connection with...

  • Page 77
    ... on shares outstanding and restricted stock units Stock-based compensation Unrealized loss on short-term investments, net of tax Unrealized gain on derivative Foreign currency translation Tax benefits from stock options Net income Balance at December 31, 2005 62,606 6 (38,067 ) 8 - - - 7,185...

  • Page 78
    ...Year Ended December 31, 2005 2004 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Deferred taxes Tax benefits from stock options Other Changes in operating assets...

  • Page 79
    ..., including NetZero, Juno and Classmates Online. The Company's subscription services include dial-up Internet access, socialnetworking, VoIP telephony, personal Web-hosting, premium email, Internet security and online digital photo-sharing, among others. The Company also offers advertising-supported...

  • Page 80
    ...money market funds. The minimum long-term credit rating is A, and if a long-term rating is not available, the Company requires a minimum short-term credit rating of A1 and P1. The Company's short-term investments are reported at fair value, with unrealized gains and losses, net of taxes, recorded in...

  • Page 81
    ... to perform satisfactorily or to continue to offer their services. Any material disruption of these services could have a material adverse effect on the Company's financial position, results of operations and cash flows. Long-Lived Assets- Property and equipment are stated at historical cost less...

  • Page 82
    ... declines in the Company's stock price for a sustained period or significant underperformance relative to expected historical or projected future results of operations. The Company determines reporting units by allocating assets, including goodwill, based on its related service offerings. In testing...

  • Page 83
    ... in which the related services are provided. Advance payments from users are recorded on the balance sheet as deferred revenue. The Company offers alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include electronic check payment...

  • Page 84
    ...-networking services are allocated based on the number of Web site visits by free accounts relative to the total number of visits. Sales and Marketing- Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new pay and free accounts...

  • Page 85
    ... of new or improved software and technology, including personnel-related expenses for the software engineering department and the costs associated with operating the Company's facility in India. Costs incurred by the Company to manage, monitor and operate the Company's services are generally...

  • Page 86
    ..., 2005 2004 Six Months Ended December 31, 2003 Year Ended June 30, 2003 Net income, as reported Add: Stock-based compensation included in net income, net of tax Deduct: Total stock-based compensation determined under fair value-based method for all awards, net of tax Pro forma net income Net income...

  • Page 87
    ..., including NetZero, Juno, and Classmates Online. The Company's pay services include dial-up Internet access, social-networking, VoIP telephony, personal Web-hosting, online digital photo sharing and premium email services, among others. The Company also offers, at no charge, advertising supported...

  • Page 88
    ... effective in the March 2006 quarter, and the Company expects that the adoption of SFAS No. 123R will have a material impact on the Company's operating income, net income and earnings per share. However, uncertainties, including the Company's future stock-based compensation strategy, stock price...

  • Page 89
    ...No. 141, Business Combinations . The primary reason for the acquisition was to acquire PhotoSite's software and services to expand the Company's subscription offerings. The purchase price was allocated to the net assets acquired based on their estimated fair values, including identifiable intangible...

  • Page 90
    ... income taxes Capital leases Other long-term liabilities Total net liabilities assumed Intangible assets acquired: Trademark and trade name Advertising contracts and related relationships Pay accounts Free accounts Other intangibles Total intangible assets acquired Goodwill Total purchase price...

  • Page 91
    ... was to acquire About, Inc.'s Web-hosting services and account base in order to expand the Company's service offerings. The purchase price of approximately $11.9 million was paid in cash and allocated to the net assets acquired based on their estimated fair values, including identifiable intangible...

  • Page 92
    ... Deferred service liabilities Total net tangible assets acquired Intangible assets acquired: Pay accounts Proprietary rights Software and technology Total intangible assets acquired Total purchase price $ 1,611 585 (649 ) (1,044 ) 503 7,500 235 150 7,885 $ 8,388 4 years 3 years 2.5 years The...

  • Page 93
    ...the six months ended December 31, 2003 and the year ended June 30, 2003 was $15.5 million, $8.7 million, $3.1 million and $11.1 million, respectively. Assets under capital leases are included in computer software and equipment. At December 31, 2005, the amount capitalized and the related accumulated...

  • Page 94
    ... the state income tax rate expected to apply to future reversals of acquired book/tax basis differences. Intangible assets consist of the following (in thousands): December 31, 2005 Accumulated Cost Amortization Net Pay accounts and free accounts Trademarks and trade names Advertising contracts and...

  • Page 95
    ... 2003, United Online obtained a one-year $25 million unsecured revolving line of credit from a bank that was to expire in December 2004. This facility was available for general corporate purposes and the interest rates on borrowings were based on current market rates. The line of credit contained...

  • Page 96
    ... and losses would be recognized in the results of operations in that period. The Company recognized an unrealized gain of approximately $0.1 million in accumulated other comprehensive income during the year ended December 31, 2005 related to the effective portion of the cash flow hedge as the cap...

  • Page 97
    ...rights at $0.0007 per right at any time until 10 days after a public announcement that a 15% position in the Company's common stock has been acquired or that a tender or exchange offer which would result in a person owning 15% or more of the Company's common stock has commenced. The rights expire on...

  • Page 98
    ... additional $97.3 million at December 31, 2005, subject to further annual limitations. In January 2006, the Company paid, in full, the outstanding balance of the term loan of approximately $54.2 million. Effective upon payment of the outstanding balance, the Credit Agreement terminated and is of no...

  • Page 99
    ...): Year Ended Year Ended December 31, 2005 2004 Six Months Ended December 31, 2003 June 30, 2003 Numerator: Net income Denominator: Weighted average common shares-basic Adjustment to weighted average for common shares subject to repurchase Adjusted weighted average common shares- basic Effect of...

  • Page 100
    ... tax rate to the Company's effective income tax rate (in thousands): Year Ended December 31, 2005 2004 Six Months Ended December 31, 2003 Year Ended June 30, 2003 Taxes on income at the statutory federal rate State income taxes, net of federal tax benefits Re-measurement of net deferred tax assets...

  • Page 101
    ...measurement of net deferred tax assets, including a change in New York State tax law. For the year ended December 31, 2004, the Company recorded a tax benefit of $34.1 million on pre-tax income of $83.4 million, resulting in an effective tax rate benefit of 40.8%. The effective tax rate differs from...

  • Page 102
    ... allowance related to the Company's deferred tax assets at December 31, 2005, the Company reviewed both positive and negative evidence pursuant to the requirements of SFAS No. 109, including current and historical results of operations, the annual limitation on utilization of net operating loss...

  • Page 103
    ... the Classmates 2004 Stock Plan (i) to employees, directors and officers of Classmates or its subsidiaries whose service commenced prior to the date of the acquisition and (ii) to employees, consultants, directors and executive officers of United Online or its subsidiaries whose service commenced or...

  • Page 104
    ...Plans during the year ended June 30, 2003, the six months ended December 31, 2003 and the years ended December 31, 2004 and 2005 (in thousands, except per share amounts): Number of Shares Price Per Share Weighted Average Exercise Price Options outstanding at June 30, 2002 Granted Exercised Canceled...

  • Page 105
    ... (in thousands): Year Ended Year Ended December 31, 2005 2004 Six Months Ended December 31, 2003 June 30, 2003 Operating expenses: Cost of billable services Sales and marketing Product development General and administrative Total stock-based compensation Acceleration of Stock Options $ 183...

  • Page 106
    ... the Company's executive officers. Each RSU entitles the officer to receive one share of the Company's common stock upon vesting. The units vest 25% annually over the four-year period beginning February 15, 2005. In connection with these units, the Company recorded deferred stock-based compensation...

  • Page 107
    ... RSUs to these executive officers. Each RSU entitles the officer to receive one share of the Company's common stock upon vesting. The units vest 25% annually over the four-year period beginning August 15, 2005. In connection with these units, the Company recorded deferred stock-based compensation of...

  • Page 108
    ... 2006. On August 21, 2001, Juno commenced an adversary proceeding in U.S. Bankruptcy Court in the Southern District of New York against Smart World Technologies, LLC, dba "Freewwweb" (the "Debtor"), a provider of free Internet access that had elected to cease operations and had sought the protection...

  • Page 109
    ... actions will not be material or adversely affect the Company's business, financial position, results of operations or cash flows. 10. TRANSITION PERIOD COMPARATIVE DATA The following table presents certain financial information for the six months ended December 31, 2003 and 2002, respectively (in...

  • Page 110
    ... for doubtful accounts: Year ended December 31, 2005 Year ended December 31, 2004 Six months ended December 31, 2003 Year ended June 30, 2003 Valuation allowance for deferred tax assets: Year ended December 31, 2005 Year ended December 31, 2004 Six months ended December 31, 2003 Year ended June 30...

  • Page 111
    ... NetZero, Inc., a Delaware corporation (also dba PhotoSite) Juno Online Services, Inc., a Delaware corporation NetBrands, Inc., a California corporation (dba BlueLight Internet Service) Classmates Online, Inc., a Washington corporation United Online Web Services, Inc., a Delaware corporation...

  • Page 112
    ..., 333-121217 and 333-123392) of United Online, Inc. of our report dated March 3, 2006 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial...

  • Page 113
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 114
    ...in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who...

  • Page 115
    ... of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Annual Report on Form 10-K of the Company for the year ended December 31, 2005, as filed with the Securities and...

  • Page 116
    ... of United Online, Inc. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Annual Report on Form 10-K of the Company for the year ended December 31, 2005, as filed with the Securities and...